Is a Bridging Loan Right For Me?
Bridging loans offer a fast way to purchase properties by helping borrowers to become cash buyers.
Rather than waiting a long time for a mortgage to be approved or for the delays that come with property chains, a bridging loan can be approved and funded in around 2 to 4 weeks.
This makes bridging finance popular for people who want to purchase a home under a tight deadline or for ambitious property developers who are looking to actively grow their portfolios.
Understand The Risks Of Bridging Loans
Bridging loans come with important risks. Due to their fast turnaround and short term nature, the rates charged are more expensive than standard mortgages and if you struggle to repay your loan, you can be at risk of late fees and your property being repossessed by the lender.
For context, whilst a regular interest rate for bridging finance is around 1%, a default interest rate is around 2% per month and a late fee and account review fee may also apply. Any missed repayments will also have a negative impact on your credit score.
In the worst case scenario, if you are unable to repay your loan, you could risk losing the property through repossession and this could be your original primary residence or investment that you have put a lot of work into.
When Are Bridging Loans Used?
To move home – Homeowners may use bridging loans to purchase a new home if they have been unable to sell their own. Rather than continue to wait for their home to be sold, they can use the funds from a bridging loan to purchase their desired property. This is common in scenarios when the property they want is very attractive and they could risk losing it. The homeowner has the duration of the bridging loan to sell their house (12-24 months) and once it is sold, it automatically clears the interest and repayment for the bridging loan.
To buy properties at auction – When buying a property at an auction, both residential and commercial, 10% of the funds are required on the day you win the bid and a further 90% of the property’s value is required within 28 days. A bridging loan (also known as auction finance) can help you come up with the remaining funds within the required timeframe.
To pay for renovations – Bridging finance can help pay for light or heavy refurbishments and upgrades to a property. This is often in tandem with purchasing a new property for it to be sold or rented out to tenants.
To grow a property portfolio – For property developers looking to grow their portfolios, bridging finance allows them to acquire other properties with small deposits at 75% LTV. This is practical when you have capital tied up in other projects but have ambitions to keep building.
To break property chains – If you are purchasing a property and are stuck in a very long chain, the use of a bridging loan helps you to become a cash buyer and move quickly on a property sale. When there is a long chain, owners are usually relying on the equity from the sale of their property to purchase the next property – but a bridging loan can give you the same amount upfront. You just need to be able to sell your own property within the 12-24 month timeline.
Is a Bridging Loan Right For You? The Pros and Cons
Pros:
Fast – Bridging finance deals are regularly funded in under one month, which is a vast improvement to a mortgage which usually takes several months. Lenders can offer indicative terms on the day and decision in principles in 48 hours.
Flexible – Every property deal and project is unique and bridging loans address this with very specific and flexible terms when it comes to drawdowns and repayments.
Large amounts – Bridging loans can start from £50,000 to several million and customers can access 75% or 80% of their property’s value.
All credit considered – Those with adverse credit histories may still be considered if they have an attractive property or opportunity.
Cons:
High interest – Due to the speedy nature and short term timeframe, the interest rates for bridging loans are around 1% per month, compared to a mortgage which currently is around 5% per year.
Deadlines can be pressurising – Using bridging to refurbish and add value to a property is effective, but if there are building delays or costs are mounting up, this becomes a very pressurised situation when the end of your loan term is looming and full repayment is required.
Late fees and repossession – Any late repayments incur late charges, such as default interest, penalties, account review fees, potential court action and also put the property at risk of repossession.
Is a Bridging Loan Right For Moving Home?
Yes, bridging loans are a viable option if you are moving home and want to secure another property very fast. If you need to complete it in 2 weeks or are breaking a chain, bridging can be a practical option.
In fact, being a cash buyer is the fastest way to purchase a property and bridging finance turns customers into cash buyers.
But unless you have a strict deadline or are stuck in a property chain, bridging is a riskier option than borrowing through a mortgage.
When using bridging loans, you are essentially using your existing home or property as collateral.
If your initial property sells quickly, then you will not incur too much interest.
But if your property continues to be on the market for a long time, you may be stuck taking a very low offer for your house or if it is unsold, you risk incurring late fees from the lender and even repossession as they attempt to recover their funds.
Is a Bridging Loan Right For Property Investments?
A bridging loan in the UK can be a suitable option for property developments and investments, particularly when speed and flexibility are crucial. T
This source of finance is often used by investors who need to secure a property quickly, such as purchasing at auction or closing a deal within a tight deadline.
They are also commonly employed for financing property renovations or developments, allowing investors to add value before selling or refinancing.
Additionally, bridging loans can help bridge the gap when there is a delay in the sale of an existing property, helping the investor to proceed with a new purchase without waiting for the previous sale to complete.
Despite their benefits, bridging loans come with higher interest rates and fees compared to traditional mortgages and are intended for short-term use.
A clear exit strategy and management of costs and building work is essential to ensure the loan is repaid on time. Hence they are most effective for investors with a well-defined plan and the means to cover the associated costs.
Are Bridging Loans More Expensive Than Mortgages?
Yes, on average bridging loans are more expensive than mortgages, charging 1% per month, compared to 5% per annum.
Additionally, bridging loans may include various fees such as arrangement fees, exit fees and broker fees which you may not pay if you apply for a mortgage directly with your bank.
Unlike mortgages, which are designed for long-term repayment over 5 to 25 years, bridging loans are intended for short-term use, usually lasting between 3 to 24 months maximum.
The higher costs are balanced by the speed and convenience they provide, making them a viable option for investors or buyers who need quick access to funds or are dealing with unique financial situations that standard mortgages may not accommodate.
Should You Choose a Bridging Loan?
A bridging loan can be suitable for you if you need to act quickly on a property or an opportunity. Of course, mortgages are a lot more affordable, but if it works out that being approved for a mortgage will take too long or you are stuck in a long property chain, a bridging loan can serve a very useful purpose.
For property developers, the popularity of bridging loans in the last decade has offered a very flexible and scalable way to build property portfolios at speed.
However, it is just essential that you have a strong exit plan whether you are a homeowner or a property developer. As a homeowner, you can get approved for a bridging loan and purchase your onward. You just have to be certain that your original house will sell within the desired timeframe or you could be subject to some late fees, penalties and repossession of your original family home.
For property developers, you need to have a clear understanding of all the costs involved with purchasing and renovating your property. Any building delays or overrunning of costs could prove hugely costly down the line and also incur late fees and risk of repossession. Taking time to plan the financials and forecasts with your builders and professionals would be a worth exercise.
What Are The Alternatives To Bridging Loans?
Depending on the purpose of your loan, there are some very viable alternatives.
A mortgage is a more affordable option to purchase a property and there are options to remortgage after a few years to get better rates.
If you are looking to make home renovations, you could look at a second charge loan, personal loan or remortgage to release equity.
Speaking to investors, family or friends could also provide an important injection of funds if you were in desperate need of funds.
Making sure you understand all the risks and implications that come with bridging loans is very important before you proceed.